The One Big Beautiful Bill Act (OBBBA) has temporarily reshaped the rules for federal income tax deductions tied to state and local taxes (SALT). For taxpayers with significant SALT expenses, these changes could mean lower federal tax bills, but also potential pitfalls if not carefully planned.
Background on the SALT deduction
Before 2018, taxpayers who itemized could generally deduct 100% of their SALT expenses, providing significant tax savings in states with higher property or income taxes.
The Tax Cuts and Jobs Act (TCJA) changed that by capping the SALT deduction at $10,000 ($5,000 for married filing separately), beginning in 2018. That cap was originally set to expire after 2025.
What’s changing under the OBBBA?
Instead of letting the cap expire or making it permanent, the OBBBA temporarily raises the SALT cap to $40,000 ($20,000 for separate filers) starting in 2025. The limit will increase by 1% annually until 2030, when the $10,000 cap returns.
However, the benefit phases out for higher-income taxpayers. The deduction is reduced by 30% of the amount by which modified adjusted gross income (MAGI) exceeds $500,000 ($250,000 for separate filers). By the time MAGI reaches $600,000, the deduction reverts to $10,000.
Who benefits?
Deductible SALT expenses include:
- Property taxes on homes, vehicles, and boats
- Either income taxes or sales taxes (but not both)
The IRS provides a Sales Tax Deduction Calculator to help taxpayers determine eligible sales tax amounts.
Example: A taxpayer in the 35% bracket with $40,000 of SALT expenses and MAGI below $500,000 could save $10,500 more compared with the $10,000 cap. But if MAGI is $560,000, the deduction would shrink to $22,000. That’s still better than $10,000, but far less than the full benefit.
Standard deduction vs. itemizing
The SALT deduction only applies to those who itemize. Since the TCJA nearly doubled the standard deduction, and the OBBBA raised it even higher, fewer taxpayers have been itemizing.
For 2025, the standard deduction will be:
- $15,750 (single or separate)
- $23,625 (head of household)
- $31,500 (married filing jointly)
Still, the increased SALT cap may make itemizing worthwhile again, especially for taxpayers with high state income taxes or property taxes.
The “SALT torpedo”
High earners should watch for what’s being called the SALT torpedo — where rising income not only increases tax liability but also reduces the SALT deduction, compounding the effect.
For example, going from $500,000 to $600,000 in MAGI could increase taxable income by $130,000, effectively pushing the tax rate to 45.5% in some cases.
| MAGI | $500,000 | $600,000 |
|---|---|---|
| SALT deduction | $40,000 | $10,000 |
| Other itemized deductions | $35,000 | $35,000 |
| Total itemized deductions | $75,000 | $45,000 |
| Taxable income | $425,000 | $555,000 |
Planning opportunities
Because MAGI determines the deduction amount, taxpayers can use strategies to manage their income:
- Contribute more to 401(k) plans or Health Savings Accounts (HSAs)
- For business owners, maximize retirement plan contributions
- Avoid triggering extra income from Roth conversions, stock sales, or mutual fund distributions
If possible, you might also prepay property taxes (once assessed) to maximize deductions before the cap drops again.
Pass-Through Entity Taxes (PTETs)
In response to the TCJA cap, 36 states created PTET laws, allowing state income tax to be paid at the business level (where it’s fully deductible) rather than the personal level (where it’s capped).
The OBBBA leaves PTETs intact, but some states’ laws are set to expire after 2025. Business owners should monitor whether their states extend these provisions.
SALT and the Alternative Minimum Tax (AMT)
SALT deductions aren’t allowed under the AMT, which could catch some high-income taxpayers by surprise. While the TCJA raised AMT exemption levels, the OBBBA changes the phaseout rules starting in 2026, potentially making AMT more likely for joint filers with large SALT deductions.
Final thoughts
The OBBBA’s adjustments to the SALT deduction offer new planning opportunities, but also new complexities. Careful tax planning can help maximize savings while avoiding unintended consequences like the SALT torpedo or AMT exposure.
Our team can help you navigate these changes and align your strategy with your long-term financial goals.
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